Greek euro exit may be ‘manageable’

By Nigel Stephenson, Reuters

LONDON — Greek voters’ rejection of pro-bailout political parties in Sunday’s election has raised the chances of Greece leaving the euro but this unprecedented step is seen as manageable rather than catastrophic for the currency bloc. Some banks have raised estimates of the likelihood of Athens quitting the euro. But after a year of investors shedding bonds issued by highly indebted eurozone countries and big injections of central bank cash, they said the damage could be contained. Spanish and Italian government bonds initially sold off, the euro fell and European shares slid on Monday, the first trading after the elections. However, all these assets recovered somewhat by the end of the day despite the deep uncertainty. “This makes you wonder whether Greece is still a systemic threat or whether Greece is more of a Greek problem and a political problem for the rest of Europe,” said Valentijn van Nieuwenhuijzen, head of strategy at ING Investment Management. “Unless you have strong contagion into Spain and Italy, it’s unlikely to be really an issue that would undermine the whole eurozone.” The Greek impasse, created when voters sick of austerity deprived the two main parties which back the country’s international bailout program of a parliamentary majority, has potentially increased the risk of it having to restructure its debts for a second time.

Citi raised the probability of Greece leaving the euro area to between 50 and 75 percent from 50 percent previously. Its currency strategist, Valentin Marinov, said the bank’s economists expect it would be out within 12 to 18 months.

Since Greece took the first of its two bailouts in May 2010, international banks have sharply reduced their exposure to Greek and other peripheral government debt. Greek debt is largely in the hands of the ECB as well as Greek domestic banks and speculative investors such as hedge funds which pose less of a risk to the entire eurozone. “From that point of view, there is the possibility that Greece would be allowed to go its own way, whatever the Greek people choose that to be, and it could be managed by the rest of Europe,” Rabobank currency strategist Jane Foley said. “By putting up the ring-fences and limiting the exposure, the damage that Greece could do is far lessened.”

As Greece, Ireland and Portugal successively took bailouts, European institutions increased the firepower of their rescue fund in an effort to calm markets and the European Central Bank made available 1 trillion euros of cheap three-year funding.